Moody's: US Will Plunge Into Recession if Washington Talks Fail

Moody's Analytics warned that the U.S. economy will fall into recession by spring if the Obama administration and House Republicans fail to agree on federal fiscal policy.

Given the severe consequences of going over the fiscal cliff, however, chief economist Mark Zandi concludes that the "most plausible outcome" is that the two sides will reach agreement to avert that worst-case scenario.

Zandi assumes negotiations may have to extend into 2013, which he said will raise uncertainty and cause growth to nearly stall out in the first quarter.

Once agreement has been reached, the Moody's economist foresees real economic growth of about 2 percent in 2013, nearly double that in 2014 and near 4 percent again in 2015.

Job growth, he said, should accelerate from approximately 2 million jobs per year today to nearly 3 million, and unemployment will fall sharply as job creation picks up.

Adding to the economic threat of the fiscal cliff, Zandi said, is the approaching Treasury debt ceiling. Based on recent government expenditures and receipts, the Treasury will come close to its limit of about $16.4 trillion late this year.

The Obama administration will have to address that by early March, he said.

Moody's also forecasts that lawmakers are likely to extend the Bush-era tax rates for the 97.5 percent of U.S. households making less than $250,000 a year and eliminate most of the spending cuts scheduled under the 2011 sequestration agreement.